Everything that is wrong with economic development in short form

This is exactly what is wrong with economic development in this province. You want a case in point, read this article interviewing the eminent Université de Moncton economics professor Pierre-Marcel Desjardins.

“Hitting a few home runs is nice but having very strong and very vibrant small- and medium-sized businesses will give better dividends,” he said.

One economic development officer he spoke to of late said allowing for the creation of four firms employing 20 people is better than netting one company employing 100; if the one company falls, all the jobs are lost.

This is what happens when an economist weighs in on economic development. Pierre-Marcel Desjardins wouldn’t know economic development if it hit him in the face. Reread my column from this week. 95% of all government effort in the area of economic development is designed to promote startups and growing SMEs and it hasn’t worked.

I don’t want to revisit all my arguments here. You have read them over and over again. But the truth is that somehow these anti-investment advocates have convinced people that the government is only focusing on attracting big business to the detriment of small business.

Let me tell you something. The Graham government has attracted less jobs from national and multinational firms in its first three years than the Lord government. And you Pierre-Marcel Desjardins and CFIB are going to force them to go even deeper underground with all this crap.

I dare the CFIB to debate me in front of its membership on this issue. I would argue the $300 million in new direct payroll from attracting industry to Moncton over the past 15 years is far more beneficial to the CFIB membership than tweaking the tax rates. When former Premier Lord cut the small biz tax rate, New Brunswick went on to have the second worst rate of new business start ups in North America.
Sigh.

24 Responses to Everything that is wrong with economic development in short form

Thank you David for standing up and saying what needs to be said. I read this article and fumed with anger this morning.
Talk about culture of defeat. We are headed into deeper trouble with these attitudes. Wow.

I’d love to see that debate. My company is a member of CFIB. Why? Because we get a good break on credit card service rates. Every month or so, CFIB sends me a survey form. Almost without exception, the ‘questions’ are apparently designed to elicit a particular response. That is, the composers of the survey have a point of view and they design a survey aimed at reinforcing that point of view. CFIB uses credit card rates and a few other services to build a membership, then crafts dubious surveys in order to pretend they represent the opinions of business owners. I’d love to see them get smashed in a debate, but like AIMS, they normally prefer to run the other way.

Actually, you are wrong and I”VE also debated that plenty. Here’s the track record of late:

1. $50 million loan to Nackawic AV (which pays NO tax)
2. Untold millions, even billions in technology tax credits to forestry companies (no tax).
3. Millions to Molson (who have packed up and moved for cheaper labour before-in fact this time-to kill the Barrie union)
4. Atlantic Yarns (how much was that again?)
5. 10 million direct payout to Irving Pulp and Paper (apart from the tax credits).
6. $50 million underwrite to RDC or whatever that Miramichi company that is doing the bridge work (and thats on top of previous payouts to them since the project started).

That’s just the big ones that have shown up of late, and doesn’t include gold clubs, hotels, etc. You think small start ups have gotten that kind of money? We know even ACOA handed out way less than that, and its doubtful those were ‘startups’.

Besides that, of course he’s perfectly right, five companies employing 20 people is ‘better’ than one employing a hundred people for exactly the reason he gives. Your argument has been that ‘new’ corporations tend to pay better, and that’s fair enough, but that is hypothetical since they haven’t been coming to NB. Only resource companies have been expanding.

During the Lord years the small business tax was cut, and you point out that small businesses plummeted (although SOME became corporations). However, tax carry forwards have meant that forestry companies haven’t paid tax in YEARS, even decades.

MY point is that you BOTH are right, because you are both talking hypothetically and with different arguments. My two points that I’ve stressed is that you are buying into their propaganda-the government does NOT support new businesses, not unless they are with cronies, and the help they give is usually too little, too late (thanks to bureaucracy). I know several provincial companies that have gone out of business for the simple reason that they were run by single women and since NB has one of the worst child care programs, they simply couldn’t juggle everything-now they are on welfare with kids to support.

The CFIB, of course, is an organization of EXISTING businesses, who know darn well that policies for NEW businesses means competition for them. They favour policies that help established businesses, which have very different needs than a new business.

Let’s talk animation, can’t you honestly say NOW that Miramichi animation would have been better off with five companies rather than just FatKat? FatKat is now gone, had there been four others, then obviously there would still be a market.

So that is NOT what is wrong with ED in the province. What is wrong is that there are FEW policies to either attract that 100 employee firm OR those 20 employee firms. There is no serious interest in new businesses, and not much in getting new institutional ones. EITHER approach makes sense economically. New businesses of the type we are talking about tend to have owners making around $30 grand, its no coincidence that liberals raised their taxes, and lowered their taxes, at percentages much worse than those earning over 100 grand-in fact the province BRAGS about that, even stating that this is how they are going to attract more doctors.

However, government can only do so much, and we don’t have a lot of details on what they do do. Several of those companies I know of actually got $10,000 grants, unfortunately, that barely covers your child care. A couple I know actually had locals volunteering to care for their kids, but with such little emphasis on education in the province, kids often run into educational problems, which makes running a small business almost impossible for a single parent. Women entrepreneurs are now a big market, but they have very different needs than men, and were one of the biggest supporters of national day care. As we now know, social programs like medicare are one of the BEST investments that can be made to help businesses, yet in Canada those are the ones getting slashed-leaving next to nothing.

So don’t get dragged into the hypothetical blame game, this guy makes perfect sense. The government hasn’t done EITHER policy. From a political point YOURS is the worse public relations view, because essentially you have to keep adding caveats-every time Irving gets 50 million for wallboard or Molson or Nackawic gets another few million for its lifeline-your argument goes down the tube.

Sorry this is so long, no time for editing. My final point is that RIM, Open Text all started with employees of 20 or less. Most biological research is done by professors in labs, with the help of students, and usually WAY fewer than 20 employees. So the knowledge industry is FAR more likely to provide 20 jobs than over 100.

A final point about FatKat is that that at least provided a lot of training to a lot of people, and remember, Fatkat got only $2 million or so during its whole lifetime, when it went out of business the province essentially said ‘who cares?’, but when nackawic makes a phone call, Graham is quick to write a cheque.

Mikel has again illustrated the lack of understanding for what economic development is all about. I am not interested in provoking an attack of caps-lock posts, but for the record, economic development is not the ill planned vote buying ventures such as Atlantic Yarns. When it comes to Irving, you are talking about repayable loans and guess what, Irving actually repays. What is frustrating is the loans to political friends that are running bad businesses and have little hope of repaying.

The point is there has not been an effective economic development effort, that is attracting quality companies with a good business case to succeed in New Brunswick, since the McKenna era. We desperately need it.

We have to stop giving money over and over to the same players. If I were in charge of business investment support here, I would offer support to a given individual ONCE. No returning to the well time after time.

We need to do this, because the people who are most skilled at obtaining government aid are those who have applied for it over and over. These are people who will simply shut down the company when the government funding runs out.

How many times must the Irvings (to pick one example) return to the province for special funding before their company becomes viable? Seriously, imagine what the money that has been directed toward their already profitable business could have done to help the many young people in the province with an education, a good idea, and no startup help.

Instead of pawning our people as low-paid staff for some multinational that we’ll mortgage our homes to lure into the community, we should be providing seed funding, incubation support, marketing and advertising assistance, etc., to help them get on their feet.

That is beautiful rhetorical flourish. Too bad economic development is not a rhetorical issue. No one that I know of is calling for “pawning our people as low-paid staff for some multinational”. I and a few others are talking about building a few key industries here that will be attractive both to entrepreneurial start ups, multinationals, university R&D, etc. That is exactly what has been done successfully across North America. By excluding any idea of attracting investment, you are choking off any serious attempts at economic development. We have spent billions trying to help small businesses “get on their feet” and what have we got for that? A quick look at New Brunswick’s exports will tell you that over 95% are from large businesses. What you are proposing is not working. I suggest that if we built, let’s say, an animation cluster and had a few key global players as anchors (like Vancouver), then other smaller firms would bubble up. But reasonable people can disagree reasonably.

There is seed money available and if it is not adequate, a great opportunity to increase it would be to convert the budgets for hundreds of people, travel and expensive office space set up to provide service to entrepreneurs into program funding to get things done. There are so many organizations established to help new business, it is confusing as to who to go to. And guess what, most of them have no money because the budget has been spent setting up and running their offices.

ACOA already has as a stated priority the supporting of SMEs, and they have spent millions on those SMEs. Problem is, many of these are never going to bring revenue into NB. If people want to support SMEs, that’s fine, but those SMEs have to be outfits that are export driven and have reasonable potential to generate high-wage jobs, not retailers, not golf clubs, not low-wage tourist operators.

Richard said:ACOA already has as a stated priority the supporting of SMEs, and they have spent millions on those SMEs.

So true. I think that has more to do with Chretien’s reform of the agency in the 90s, in that, the size and scope of business contributions (i.e. subsidies and loans) were limited through changes in legislation. No wonder McKenna called for an end to ACOA seven years after he left office … it does nothing but throw around scraps for less than sound business startups that can’t cut it in an open market. As he said, the money saved by closing it could be put to better use (in his mind toward corporate tax cuts).

Furthermore, as many are aware, the big money usually flows out of Industry Canada via the TPC. Most of it in our neck of the woods went to many of the usual suspects who probably don’t even need it (won’t name names but I’ll let you guess). Quite frankly when i spilled over most of the large grants and loans given out over the last 20 years, a majority of it was earmarked for central Canada.

Atlantic Yarns was hardly a ‘vote buying’ venture. It was part of a large ontario company, no different than Molson-which itself got money. The only difference there is that one succeeded, one failed. But again, we don’t know that in advance. As for Irving loans, there is NO way to know whether Irving pays that back unless the poster works for the Finance Department, and then we’d have to see proof. That’s the problem with ALL business investment in most provinces, we have no idea of what is actually on the books. What we DO know is that UPS and all these multinationals in New Brunswick contribute a mere 3% of the budget-that’s it. That’s the lowest in the country, even though NB has some big players that are the envy of other ‘have not’ provinces.

There is nothing wrong with what David is saying, its perfectly true, but there’s nothing wrong with what this economist is saying-THAT is perfectly true as well. Where is the data that shows that ‘billions have gone into small business investment’? I’ve been reading this blog daily for years but have never seen that. We know what ACOA does-and go read their reports, they are actually fairly successful, at least as successful as any other development program. We know that Lord lowered the business tax, but that’s not ‘investment’. Nobody goes into a small business thinking ‘well, I’ll try THIS hard because the rest is tax’.

That’s silly to think that killing ACOA will make it possible to lower corporate income tax. CIT is almost non existent in the province, the province makes twice as much from stumpage fees as it gets from all the corporations put together.

So again, what EVERYBODY here is complaining about is the status quo-that funding is inadequate, is nepotistic, is continuous, and goes to the same people. We don’t actually KNOW any of those, but the data certainly supports it. For ‘positive investments’ there are differences of opinion, yes, you can do as David says and get those ‘anchor’ positions-but just because SOME places have done that does not mean that that is the ONLY way of doing ED. There has been no serious attempt to foster small business-only cater to specific individuals. So thats just as valid, and has also succeeded in many places. I don’t care that David has his pet theory, it makes sense and good for that, but that’s not the only theory out there. For the poster above, HAD Atlantic Yarns only gotten one round of financing, then that would make sense, nobody would be screaming. That’s a good policy development, but whether it should ALWAYS apply isn’t certain.

-define ‘serious attempt’. Certainly lots of money has been spent, and its been widely spread around.

Most small businesses are service providers, and are providing services to a local community. They feed off growth but, because for the most part they will be recirculating dollars, don’t add much more revenue to the province, especially if the jobs they create are low wage jobs. NB is better off if businesses large and small are exporting products and services; that brings revenue into the province. If SMEs want support, they need to be in the export businesses that have a reasonable opportunity for growth, and be creating high-value jobs. Anchor companies are most likely going to be export-oriented, so should the SMEs asking for support. As David has said, R&D can produce innovations that can be exported; we need to be encouraging SMEs that take advantage of those innovations.

“but that’s not the only theory out there”

Yes there are planty of theories, but only a few have substantial case histories to support them. David’s approach does.

If there ever was a business case for a yarn factory in Atholville (I can see the headline now, Northern NB town conquers mammoth Asian textiles industry) as you say the dream should have been dead after the first round of funding. The only reason successful rounds of funding went into it was its geography. Same as the Shippegan Caisse. This branch for a town of 3500 quietly had a $60M taxpayer bailout.New Brunswick was bailing out banks long before the US made it fashionable. It was quiet because of its geography. Same as Atcon.

All these (questionable) actions might be perfectly good decisions but they should not be misrepresented as good economic development strategy. The north deserves better. New Brunswick deserves better.

Re the loans, BNB reports any write offs each year. That is how things like the golf courses and yarn factories hit the news. If clients do not pay, or are granted, forgiveness, it is reported.

The point is, good economic development has to involve well managed companies with a solid business case. Everything else is politics. There will always be politics. New Brunswick needs effective economic development.

Sorry mikel, but Atlantic Yarns wasn’t who I was thinking about in this case. My above screed split ACOA and TPC into two different funding categories. Fledgling doesn’t always fit the profile of being funded by the latter.

“The point is, good economic development has to involve well managed companies with a solid business case.”

For those who disagree with David’s point, a few questions: Is the business case for small NB companies solid? In other words, what are the odds for 5 companies with 20 employees to have a sustainable competitive advantage (versus one company with 100 employees)? What would be the size of their markets? What would be their export capabilities and channels? And, most importantly, how sophisticated is the local market? (i.e. is there a local/regional pull for innovation?)

On the other hand, big companies create supply and value chains, push their suppliers to innovate and increase productivity, require upgrades in infrastructure to remain competitive, etc. Just think about economic multipliers. In spite of all the criticism that we see around, Irving and AV Nackawic do just that (in the case of Irving, the large majority of these functions are consolidated). I am not defending Irving at all. My point is that we need more Irvings and McCains in New Brunswick – to make the competitive environment for these companies more challenging and, consequently, reduce somehow their political clout.

IF that were true then there would be a lot more economists as fortune tellers. The reality is reality-there is NO way to pick success or failure before a venture. Atlantic Yarns was NEVER designed to compete with asia, and they even said that they would have been viable except that the feds gave no importance to some trade policies that had canadian companies paying higher duties than central american companies.

BNB has almost NO information readily available. When Elizabeth Weir at one time was reporting that all Irvings loans should be recalled, media reported that they couldn’t even find out what they WERE. I know of small companies that regularly apply for grants, immediately claim that all their workers will lose their jobs-even if thats not true. I know of one example where the guy did it every time he needed a new car or boat.

As for Irving, that can be said about ALL their investments. In ten years New Brunswickers will have missed out on far more money than was ever put into Atlantic Yarns with the ‘investment’ that saw property tax capped at $8 million less than any other North American gas terminal (the Quebec LNG proposal actually called for TEN million dollars a year in property tax). So from a money point of view, which is the worse investment-Atlantic Yarns, which at least taught a trade and employed people in a disenfranchised area, or the LNG, which offered only short term construction work, only 10 permanent jobs, yet will save Irving $7.5 million EVERY year for 25 years. Total cost to New Brunswickers- $187.5 MILLION. And thats as long as there are no gas leaks or accidents.

The claim that ‘we need more Irvings and McCains’ doesn’t even make sense. There isn’t enough potato fields for another fry maker, and there simply isn’t enough industry to hold yet another chain of consolidated companies in trucking, gas, etc.

Again, the problems here are HOW you invest, and WHO you invest in. Those are all political questions, because in economics we don’t know the future. The rationale before was that ‘if its big then its more likely viable’ for all the reasons mentioned above. That is no longer true, and in fact its been found that that kind of development, which lets one corporate entity get ‘too big too fail’ is dangerous.

If McCains or Irving announced their interest in relocating, our airports would be filled with suitors arriving to make their pitch. The same pitch we should be making when RIM, Google or the like express interest in expanding.

We can help you Mikel. Since you are so anti big business, work with us to relocate all those Southern Ontario companies to New Brunswick then we will all be happy.

That’s hardly true. What would Irving bring to Ontario? Their headquarters is still in Bermuda, that’s where their profit resides. They aren’t public companies, so no market benefits. McCain makes french fries, and the land in southern ontario is already used up with a wide variety of produce-why would they just want potatoes? Irving has gas stations, there are lots of gas stations in ontario. There has been no new refinery in Ontario for twenty years, and none are on the horizon. Their media businesses aren’t that desirable here, as they are NB based. Northern Ontario would MAYBE want a wallboard factory, but since it is supplied by the refuse at Coleson Cove its wouldn’t be profitable. Home Depot and Rona and other large department stores are all over the place, so there is no need for Kent.

If Ontario WANTED Irving businesses, they’d be trying to get them, why would it? Lots of the lumber at Home Depot comes from Irving, and Majesta products are now in stores. So why buy the cow when you get the milk for cheap?

Their LNG terminal certainly wouldn’t be welcomed, we’ve been through that, in Maine they barely got a referendum passed by promising 60 jobs at 60 grand apiece, insurance, profit sharing, and a guaranteed 8 million a year in property tax. In Levis they turned down an LNG plant that offered even more, plus 10 million. You think anybody is going to be on a plane courting Irving to get a measly $500,000 a year in property tax? There’s a reason these companies are headquartered in New Brunswick, and if you think its because of the scenery you’re delusion.

RIM is FAR different than Irving, although with the same inherent problems. This city would be devastated if RIM went out of business, and its been far closer to doing that than Irving ever has, and it is barely a decade old. And even so its left an unpleasant imprint because Waterloo is a VERY small city and the last area that was zoned to be mixed residential and environment was changed at the last minute to allow RIM to build new buildings in the last natural space available. Meanwhile, large manufacturing buildings sit empty since companies like Lazy Boy left.

However, RIM at least is a knowledge based company. If it closed down then like NBTel you can bet there’d be a dozen start ups based on what people were doing before and the vacuum left behind. Like FatKat there is an inherent reason to desire them. For Irving, the jobs are all blue collar go nowhere jobs. They are construction and refining, things everybody knows are not employers of the future.

In short, or long, sorry, every business and every business type is different. Just like you wouldn’t expect ED staff to be going to middle east countries to invest in factories to make dirty bombs, or going to hollywood to try to build up a porn industry, there are different companies and issues with every one. While Irving and McCain serve a purpose, the jury is still out as to whether its a beneficial one or whether alternatives would be better, we’ve debated that elsewhere, but the fact is that for ‘development’ they are hardly models, and nobody in any other province has expressed any interest in either. If you wonder why, go to CBC and type in Irving and start reading the stories.

That last paragraph wasn’t clear-I know it SHOULDN’T need to be said but criticism of a model is not ‘pro’ or ‘con’ for any particular variable in that model, so the claim of being ‘anti big business’ is just a rhetorical device used for no real critical purpose.
Irving is a VERY special case in Canada, no other company anywhere in North America is like Irving, no other company that I know of has such extensive interests in such a variety of markets, including public ones. So even being ‘anti Irving’ is not the same as being ‘anti big business’. Every large corporation is different, even RIM has twice been caught doing illegal things, the latest stock accounting was the same thing Conrad Black went to jail for, yet RIM got barely a slap on the wrist.

But it depends how we define ‘big’ companies. OpenText is also in Waterloo and is a far better model, it doesn’t get political, operates in only a couple of buildings, if it went out of business it wouldn’t be an economic challenge, and its never been a drain on public finances. FatKat could have been described as ‘big’, with over 100 employees that’s fairly large, ten times more jobs than Irvings LNG plant will provide. That’s why it was a case where government should have done SOMETHING. They could have given them short term contracts to provide animation for any number of public departments, or as I’ve mentioned before, a provincial television station would be a FAR better business investment than any tax credits or payouts.

I didn’t actually say anything that was ‘anti big business’, although it would be easy to do so. Again, there is nothing inherently wrong with David’s theory of bringing in ‘anchor’ companies except the obvious two problems-what happens when the anchor disappears, and how much political influence would a powerful company have over local affairs. MANY large companies though actually go out of their way to help local economies, sometimes even when its detrimental to themselves (though not that often). The problem is that we have an entire COUNTRY that is no longer amongst companies top choice, and in disenfranchised areas its tough to get ANY external investment. So we return to the original problem-WHAT policies need to be implemented to actuallly make the province desirable?

“The claim that ‘we need more Irvings and McCains’ doesn’t even make sense. There isn’t enough potato fields for another fry maker, and there simply isn’t enough industry to hold yet another chain of consolidated companies in trucking, gas, etc.”

Mikel, I often think that you just have this crazy impulse to write without thinking. By “more Irvings and McCains” I OBVIOUSLY was not referring to companies in the same field as Irving and McCains. Now, if you think that there is no space for other companies such as these ones in NB, we might as well pack our bags and move on.

Obviously you can’t write without thinking, but a person can write without editing or thinking about what they were thinking of. In this case I can only comment on what is said. That’s NOT obvious, since McCains and Irvings are huge conglomerates whose businesses stretch beyond single industries but who have clear specific products.

Both also have very tenuous environmental policies which are usually bad for the environment. Both have legal and corporate policies that are also very different than many other corporations. So I certainly had no way of knowing that the comment simply meant ‘we need more employers’. If you had written that then it would have been clear. There are lots of other employers with better track records than McCains or Irvings (and even McCains are quite different than Irvings), so it would be better to say “we need more companies like Moosehead” or “Ganong” or even “Dunsters Doughnuts”.

One thing you can’t assume is that anything you say is ‘obvious’ to anyone else, especially after claiming that everybody else would be jumping at the chance to get Irving to their home province (which seemed to me to indicate that they are the ‘good’ kind of employers, which isn’t necessarily true).

There ARE other companies ‘like’ Irving in New Brunswick. There were numerous mining companies, there is Saskatchewan Potash, and there are the guys on the acadian peninsula stripping peat moss as fast as possible. Which is why New Brunswick has one of the worst environmental records in the western hemisphere, and why the Fraser Institute says NB is more ‘miner friendly’ than even the military junta’s in central and south america. None of those are the ‘same field’ as M and I but they are just as bad (in some cases worse).

David says it far better, while he wants more foreign direct investment he usually adds caveats as to company specifics. The province doesn’t want to get WORSE, and if you’ve been around the world then you know that this is in part an academic enterprise, things in Canada, even NB, are still pretty good.

“except the obvious two problems-what happens when the anchor disappears, and how much political influence would a powerful company have over local affairs.”

All companies will eventually disappear, so that is hardly an argument against this approach (which has case histories supporting it, especially when tied in with government R&D support). The whole idea there is to create sufficient economic growth that the ‘anchor’ becomes less important over time. As to the ‘political influence’ argument, that is actually a good thing, since these new anchors could very well be balancing against the Irvings and McCains. RIM or Google would presumably have quite different approaches to the environment than,say, Irving or Sask Potash.

Funny how RIM is considered an environmentally friendly company just because it is a new economy business and we are still in a honeymoon period with the technology. Already some concerns are emerging about RIM technology; RF from the devices causing cancer, cell towers causing concerns, disposal of all the batteries, driver distraction etc. We have been using oil and eating frozen foods for 100 years or so; issues and impacts have become well known. Just because concerns are not fully known because an industry has not fully matured, does mean the the industry is better.

It is the job of business to make returns for the owners. It is the job of governments to make and enforce progressive laws and regulation to protect us. All businesses, new or old, have the potential to negatively impact the environment and our health.

Never said RIM was ‘better’ re the environment; just different. I would bet that a smaller percentage of RIM or Google managers would favor clear-cutting or tolerate water pollution to the same extent that Irving or McCain managers would do so.

There is one thing Irving is really good at, and that’s customer service. I wish there was an Irving Big Stop in Alberta. Good home cooked meals, clean restaurants and washrooms, and a decent price. Would show some of the multi-nationals how its really done.